Richard Thaler shows us how real human beings make decisions

Richard Thaler was awarded the Nobel Prize in Economics this month for his ground-breaking work on how real human beings make decisions. We need judges, legislators, regulators, and academics to take note and repair significantly flawed securities and banking laws.

Behavioral decision-making research has revealed the deeply embedded flaws in certain legal rules that presume a perfectly rational robot-like decision-maker. The perfectly rational decision-maker is a foundation of Law and Economics, a political theory championed by Judge Richard Posner. The Law and Economics doctrine has had — for better and for worse — a profound effect on securities and banking law.

This is the perfect time for judges, legislators, regulators, and academics to correct laws and regulations that are based upon the non-existent perfectly rational robotic decision-maker. Many investors and consumers have suffered substantial harm under a legal system that fails to account for the fact that they are real human beings. We know that even SEC Commissioners fail to read the prospectuses for their own investments and the parents of an SEC Chairman were victims of investment fraud.

As Professor Thaler said at his Nobel Prize banquet speech:

“[E]conomic models were populated with “agents.” These economic agents behave more like robots than humans. They solve problems like a super computer, have the willpower of saint, are free of emotion, and have little regard for their fellow agents. The technical term for these folks is homo economicus but I like to call them Econs.

“Over the past 40 years, along with many colleagues, I have been trying to figure out how to do economics with Humans instead of Econs. We Humans are absent minded, a bit over weight, we procrastinate about saving for retirement, and – crucially – we are influenced by many supposedly irrelevant factors: how questions are phrased, what happened yesterday, what’s the default.

“To be sure, we still need traditional economic theories. But to make accurate predictions we need to enrich those models by adding insights from other social sciences. Incorporating human behavior into economic models improves the accuracy of economics, just as “cryo-electron microscopy” improves the resolution of images in biochemistry.

“Once we acknowledge that humans are fallible creatures, we can ask how to help them make better decisions. As Cass Sunstein and I have argued, we can often do so via simple nudges that point people in the right direction, but don’t force people to do anything.”

I look forward to judges, legislators, regulators, and academics — particularly those who are Law and Economics advocates — reevaluating legal doctrines based upon recent behavioral decision-making research.

You can watch the entirety of Professor Thaler’s Nobel Prize lecture here: